403(b) Contribution Limits for 2010
The 403(b), or tax-sheltered annuity, is a tax-advantaged retirement savings program designed to encourage employees of tax-exempt organizations to set aside money for retirement. Generally, employees defer a portion of their income on a pre-tax basis. In lieu of income, the proceeds accumulate within the 403(b) plan, tax deferred. Withdrawals are taxable at ordinary income rates. Traditionally, funding for 403(b) plans comes from annuities. As of 2010, however, more plan sponsors are offering mutual funds as an investment option within the 403(b) plan.
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Maximum Allowable Contributions
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There are two types of contributions to 403(b) plans: elective deferrals and annual additions. The IRS restricts your contributions to the limit on annual additions, or the limit on elective deferrals, whichever is less. Therefore, to identify your maximum allowable contribution (MAC), you must calculate each type of contribution separately. Generally, the 2010 limit for elective deferrals is $16,500. However, if you have been in service with the same organization for at least 15 years, the IRS may raise this limit to as much as $19,500. Additionally, the IRS restricts contributions from all sources --- including elective deferrals, nonelective deferrals and after-tax contributions --- to the lesser of $49,000, or 100 percent of compensation for the most recent year of service.
When to Figure Your MAC
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You should figure your MAC at the beginning of the new tax year. This allows you to make adjustments to avoid penalties, in case you accidentally overcontributed to your 403(b) plan in the previous year. You should also adjust your payroll contributions to fall within your expected MAC limits for the coming year, by making a conservative compensation estimate.
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Excess Contributions
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If you contribute more than the IRS allows, you may be subject to additional taxes and penalties. Generally, the IRS imposes a 6-percent excise tax on any amounts contributed to mutual funds over the MAC limit. However, this tax does not apply to contributions invested in annuities. You can correct the overcontribution by contributing less in the next year, or by making an allowable distribution or withdrawal. If you have made an excess contribution, you must disclose the excess contribution to the IRS by filing IRS Form 5330, unless you have already corrected it.
Permissible Distributions
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If you contributed too much and wish to correct your overcontribution to avoid the penalty, you must manage your distribution carefully. In most cases, you cannot withdraw money from a 403(b) account before age 59 and a half, unless you terminate your employment or become disabled. However, the IRS will make allowances for financial hardship, and for members of the reserve forces of the United States, by waiving the 10-percent excise tax that normally applies. You may also take withdrawals in the form of substantially equal periodic payments throughout your life expectancy, or the joint life expectancy of you and a spouse or other family member.
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